Investors to focus on buybacks, billionaire tax in Biden speech

U.S. President Joe Biden will likely put taxes and corporate stock buybacks squarely in investors' focus during Tuesday night's State of the Union address as part of his push to restructure the world's largest economy to be less favorable to the very wealthy.

Biden, who earlier last year signed into law a 1% tax on corporate stock buybacks, is expected to use his speech to call for that to be quadrupled, as well as renew his calls for higher taxes on billionaires, the White House said on Monday.

While investors said the chances of such a proposal passing in Congress - where Republicans control the House of Representatives - were low, it could have some bearing on investor behavior.

While there remains a gulf between talk and actual laws, if companies sense such a tax is imminent, it might spur them to speed up buybacks and eventually shift toward paying dividends instead.

"We could see an acceleration and that could boost earnings and equity prices this year, perhaps," said Jack Ablin, co-founder and chief investment officer at Cresset Capital. "If this tax encourages companies to raise their dividends instead of buying back shares, all in all, it's not a bad thing."

The address comes at a time when the S&P 500, which had rallied 6.2% in January, has come under some pressure as investors weigh the U.S. Federal Reserve's encouraging words on some progress on controlling inflation against a robust labor market that hints at a longer period of policy tightening.

Other topics will be watched by investors, particularly remarks on China, a key area of interest for investors.

Given the recent shooting down of a suspected Chinese spy balloon off the coast of South Carolina by the U.S. military, investors will be looking to see how forcefully Biden addresses U.S.-China relations.

"We would expect Biden to address the recent issue related to the Chinese spy balloon and articulate whether or not a response by the U.S. could further dampen relations with China," said Leo Harmon, chief investment officer of the equity management team at Mesirow, who said geopolitical risks could weigh more heavily on market sentiment over the intermediate term.

Evercore ISI strategist Julian Emanuel expects Biden's words on China to likely underpin volatility and dampen "speculative spirits," he said.

Biden's words on the $31.4 trillion debt ceiling will also be of interest to investors. Biden will insist in his address that raising the debt limit is not negotiable and should not be used as a "bargaining chip" by U.S. lawmakers, his top economic adviser Brian Deese said on Monday.

BUYBACKS & BILLIONAIRES

Corporate stock buybacks, where public companies buy back their own shares, thereby juicing the price of the shares, as a way to return cash to shareholders, have grabbed headlines this year. Buybacks are on pace for a stronger start to 2023 than a year ago in terms of dollar value -- though fewer companies are announcing them.

While companies have been criticized for spending big on buybacks at the cost of underinvesting in innovation, the repurchase of shares has been a contributor to equity market gains in recent years.

Even if the tax goes up, the ultimate impact may be relatively small, said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

Silverblatt estimates the existing 1% tax will shave off only 0.5% from S&P 500 earnings in 2023.

S&P 500 companies' stock buybacks are expected to total $220 billion for the fourth quarter of 2022, with 2023 set to be the first fiscal year with over $1 trillion in buybacks, according to data from S&P Dow Jones Indices.

If the tax were to go up to a 2.5% to 2.75% levy, it could start to move money from buybacks to dividends, but not dollar for dollar, Silverblatt said.

Biden is also expected to call for another narrow tax increase: a "billionaire minimum tax" aimed at taxing the unrealized capital gains from assets such as stocks, bonds, or privately held companies of high-net-worth individuals.

But that proposal would be a highly complicated new tax regime, creating difficulty for a currently overwhelmed Internal Revenue Service and complexity for taxpayers, according to the nonpartisan Tax Foundation.

Still, analysts were skeptical of this also coming to fruition.

"The tax proposals are dead on arrival since Congress is divided, so it is more of a political talking point for the upcoming campaign just as tax the 1% has been in the past," said Ulf Lindahl, chief executive at Currency Research Associates.